Approaching Investing As A Young Professional

Between 401(k)s, compound interest and ETFs, there’s enough investing jargon to make your head spin. Can young professionals with fixed budgets be savvy investors? Absolutely.

Here’s one of the investment world’s best-kept secrets: You don’t need that much money to start. The earlier you start investing, the longer your money has to grow by the time you retire. To set yourself up for a strong financial future, here’s what you need to know about investing — and why you should start now.

Compound interest

Consider this: The earlier you start investing for retirement, the larger returns you’ll see over time. Thanks to compound interest, a 25-year-old who consistently contributes to her retirement will be well ahead of someone who doesn’t start saving until age 35.

Let’s say you put 3% of your $30,000 salary a year in your 401(k). Your employer matches 3%. The returns will vary depending on the mix of investments, but for example, consider a 10% return.

Year 1: 6% of your salary = $1,800

Year 2: $1,800 + 10% return + additional 6% of your salary = $3,780

Year 3: $3,780 + 10% return + additional 6% of your salary = $6,158

That’s only after three years, not considering pay increases. As you begin to earn more, you could also increase the percentage you contribute, leading to even greater returns.

Types of retirement accounts

These are the most common retirement accounts available to early-career professionals.

401(k)

A 401(k) is a retirement savings plan sponsored by your employer. Some employers also offer a 401(k) match: If employees contribute to their retirement funds, the employer will also put in a certain amount. If your employer offers this perk, take advantage of it. 401(k) matching policies vary by company, so speak with your HR department to understand how yours works. Aim to contribute the maximum amount that qualifies for your employer match—if your employer matches up to 4%, put in at least 4%.

Individual Retirement Accounts (IRAs)

IRAs are an option if you don’t have employer-sponsored retirement accounts.

Contributions to a Traditional IRA maybe tax-deductible, meaning you can deduct the amount you put in during the course of the year from your taxes. If you withdraw funds before you retire, you’ll have to pay penalties. The maximum amount people 50 and younger can contribute to a Traditional IRA in 2018 is $5,500.

A Roth IRA is a post-retirement account, meaning you will not receive any tax benefits from your contributions.However, you maybe able to withdraw contributions without paying a penalty, if the fund were held for five years. For 2018, Roth IRAs also have a $5,500 limit for people under age 50.

Types of investments

Investing can be risky, but all investments are not created equal. This is why most financial advisors recommend people building up their retirement savings. These can include (but not limited) mutual funds and ETF's.

Mutual Funds: A professionally managed investment portfolio. Instead of having to pick the investments yourself, you invest in a portfolio of stocks, bonds and securities. The mix of investments is selected by professional investors.

Target-Date Funds: A type of mutual fund that is a combination of stocks and bonds that are selected based on your anticipated retirement age. The mix of funds will likely be slightly riskier when you’re young because you have more time to bounce back if the market dips. As you get older, TDFs alter the mix of funds to reduce their risk.

Exchange-Traded Funds: Exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.

Consider meeting with a financial advisor or investment advisor to better understand your options and which investments might be the best fit.

Investing do’s and don’ts

Putting money into lower-risk investments is not a get rich quick scheme—your money will grow over time.

The stock market goes through peaks and valleys, so if the market dips, stay calm. While you might feel compelled to pull your money out during a dip, most financial advisors recommend against this. Inevitably, the market will rise again.

Set up automatic contributions to your retirement account from your paycheck. If you have to manually transfer money over, you might forget.

Ramp up as your income grows. Every time you get a 3% raise, bump up your retirement contribution by 1%.

Brush up on your investing knowledge. It takes time to wrap your head around investing. Meet with a professional financial advisor and sign up for the Fifth Third newsletter to guide guidance on meeting your financial goals.

Investing involves risk, including the possible loss of principal invested.

This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank. Loans are subject to credit review and approval.

Related Articles

Fifth Third Bank provides access to investment services through various subsidiaries, including Fifth Third Securities. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a registered broker-dealer and a registered investment advisor registered with the U.S, Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Investments, investment services and insurance:

Are Not FDIC Insured

Offer No Bank Guarantee

May Lose Value

Are Not Insured by any Federal Government Agency

Are Not a Deposit

Contact Us

1-866-671-5353

Speak to a sales advisor about our products and services

Branch & ATM Locator

Leaving 53.com

You are leaving a Fifth Third website and will be going to a website operated by a third party which is not affiliated with Fifth Third Bank. That site has a privacy policy and security practices that are different from that of the Fifth Third website. Fifth Third and its affiliates are not responsible for the content on third parties.

Sign up for Our Newsletters

Sign up for Our Newsletters

Email Address

Capital Markets Bi-Weekly Newsletter

A bi-weekly newsletter that provides an overview of key trends and market conditions in the capital markets in which Fifth Third is active and engaged to help you better evaluate and manage the market risks that affect your business.

Capital Markets Industry Spotlight

This quarterly newsletter includes market reports on various key industries highlighting recent transaction and market data as well as key industry trends and analysis.

Economic Beat

A weekly newsletter distributed in the format of a 3-5 minute video that provides the latest update and outlook on the economy from the perspective of Fifth Third Bank.

Fraud Focus

A monthly newsletter designed to provide you with details on current fraud related threats and recommendations for helping protect your business.

Treasury at a Glance

A quarterly newsletter features thought provoking articles, resources and tools to help you manage working capital.